RESEARCH PAPAR INDIAN INDIVIDUAL INVESTORS BEHAVIOUR

In partial Fulfillment of the degree of Post graduate diploma in management (PGDM) (SESSOIN 2009-11)

Submitted To
Prof. Y.L. GROVER Director General M.E.R.I.

Submitted By
RAM BALI YADAV PGDM Roll No. 109317

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ABSTRACT
This paper while discussing the characteristics of the Indian individual investors along makes an attempt to discover the relationship between a dependent variable i.e., Risk Tolerance level and independent variables such as Age, Gender of an individual investor on the basis of the survey. Indian investors are high income, well educated, salaried, independent in making investment decisions and conservative investors. From the empirical study it was found that irrespective of gender, most of the investors (41%) are found have low risk tolerance level and many others (34%) have high risk tolerance level rather than moderate risk tolerance level. It is also found that there is a strong negative correlation between Age and Risk tolerance level of the investor. Television is the media that is largely influencing the investors decisions. Hence, this study can facilitate the investment product designers to design products which can cater to the investors who are low risk tolerant.

Keywords: Indian individual investor, Investor characteristic, risk tolerance level.

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Introduction
When the BSE Sensex was hovering around the 21000 levels in the month of January 2008, irrational exuberance was the order of the day. Then, few investors would have foreseen a fall of over 70% in the subsequent 12 months period. Expectedly, the exuberance has been forgotten and despondency has set in. The market is so volatile that its behavior is unpredictable. In the past couple of years, the movement of share prices exceeded all the limits and had gone remarkably low and high levels. These dramatic prices of the shares ruin the concept of intrinsic value and rational investment behavior. The traditional finance theories assume that investors are rational but they are unable to explain the behavior and pricing of the stock market completely.

Indian Investors have to endure a sluggish economy, the steep market declines prompted by deteriorating revenues, including alarming reports of scandals like that of Satyam computers, ranging from illegal corporate accounting practices to insider trading etc to invest their money in the stock market. Whether or not Stock markets performance is simply the result of intelligible characteristics of the investor is the question that still baffles the analysts. Despite loads of information bombarding from all directions, it is not the cold calculations of financial wizards, company performance or widely accepted criterion of stock performance but the investors irrational emotions like overconfidence, fear, risk aversion, etc., seem to decisively driving and dictating the fortunes of the market is increasingly realized by the analysts.

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Need for the Study

Stock market has been subjected to speculations and inefficiencies, which are beached to the rationality of the investor. Traditional finance theory is based on the two assumptions. Firstly, investors make rational decisions; and secondly investors are unbiased in their predictions about future returns of the stock.

Objectives of the Study

To develop a profile of sample Indian individual investor in terms of their demographics. To identify the objective of investment plan of an Indian individual investor. To know the preferred investment avenues of the Indian individual investor. To know the extent of financial literacy of individual investors To identify the preferred sources of information influencing investment decisions. To know the risk tolerance level of the individual investor and suggest a suitable portfolio.

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Methodology
Based on the responses of the questionnaire, analysis has been carried out. Statistical methods and Correlation have been used to uncover relationships among the variables. For measuring the risk tolerance level cumulative scale has been used. Correlation is used to know the relationship between Risk tolerance level and The Age of the investor The questionnaire consists of 32 questions of which first 10 questions were focused to know the demographic characteristics of the investor. Next 16 questions to find the risk tolerance level of the investor and the rest were focused to accomplish the other objectives of the study.

Sample Design
Many investors were reluctant to divulge their investment details especially the amount of money invested so; referral sampling method is used for this study. It has been carried out with a sample size of 100 investors.

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Literature Survey
Several studies have brought out the relationship between the demographics such as Gender, Age and risk tolerance level of individuals. Of this the relationship between Age and risk tolerance level has attracted much attention. An individuals risk tolerance is related to his/her household situation, lifecycle stage and subjective factors. Factors that were related to individuals risk tolerance, which included years until retirement, knowledge sophistication, income and net worth. Males are more risk tolerant than females. Found risky asset fraction of the portfolio to be positively correlated with income and age and negatively correlated with marital status. Although the households appear to become less risk averse as their wealth increases. It found individuals to increase their investments in risky assets throughout their working life time, and decrease their risk exposure once they retire. Identifying the systematic patterns of investment behavior exhibited by individuals found age and expressed risk taking propensities to be inversely related with major shifts taking place at age 55 and beyond. Indian studies on individual investors' were mostly confined to studies on share ownership.

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Analysis of the Survey

Parameter
Gender Male Female Total Age (in Years) Below 35 35 50 51 - 60 Above 60 Total Marital Status Unmarried Married Total Employment Status Salaried Self employment (Business) Retired(others) Total Education Level Under Graduate Graduate Post Graduate and above Total Occupation Accounts, Finance and Investment Professionals Others Total

Number of Investors in Percentage

80% 20% 100

36.7% 53.3% 06.7% 03.3% 100

22% 78% 100

65.3% 28.7% 6% 100

10% 43% 47% 100

43.3% 38.7% 18% 100

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Interpretation
According to figure (80%) of the investors are men and the rest (20%) are females. Generally males bear the financial responsibility in Indian society, and therefore they have to make investment (and other) decisions to fulfill the financial obligations. When it comes to age, it was found that 36.7% are young and significant number (53.3%) of them are in the age group of 35 to 50. The marital status of 78% of the investors was found to be married and the rest are unmarried. This is because a married individual is considered to have dependents so relatively more invested and involved in making financial investments.(47%) of the individual investors covered in the study are postgraduates; (43%) investors are graduates and (10%) of the investors are under-graduates. From table , it is interesting to note that most investors (covered in the study) can be said to possess higher education (Bachelor Degree and above), and this factor will increase the reliability of conclusions drawn about the matters under investigation. (43%) of the investors covered in the study have been found to be in professions related to finance, accountancy, investment, banking, broking, and financial management etc and (39%) of the respondents are software engineers, architects, medical and dental practitioners, teachers, lawyers etc. (18%) of the respondents can be said to belong to 'non-accounting or non-financial' occupations and the other occupations.

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Other Characteristics of Sample Investor

Parameter
Reading Behavior 4 or more sources 2 3 sources Only 1 source Total Investment Decisions are based Taken on own initiative Taken on own initiative but with help from an expert Made by expert on investors behalf Total Regularity of Investment Decisions Frequently Not so frequently Total

Number of Investors in Percentage

39.3 26.7 34.0 100.0

74.0 18.0 8.0 100.0

59.3 40.7 100.0

Interpretation: The study has attempted to enquire about other characteristics of

investor such as the reading behavior of the Investors. It is noteworthy to find that (39%) of the investors read four or more sources, (27%) of the investors read two to three sources, (34%) of the investors only one source. One may infer from the figures that most investors tend not to depend upon expert advice and help while making investment decisions. However, the majority of the investors (74%) make investment decisions without the help and advice from experts; only (18%) investors consult some experts, for advice in investment decisions. And (8%) of the investors allow the expert to take decision on their behalf. Most of the investors (59%) make investment decisions o0n a regular basis.

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Objective of Investment Plan

When investor was queried about his/her objective behind any investment, given that all the available investment avenues available to him will assure safety, liquidity and tax benefit, the objective of investment plan of the investors is shown in the following table. Parameter Objective of investment Plan Capital Appreciation Balance of capital appreciation and current income Supplement to their current income Total Number of Investors in Percentage

42.0%

43.3% 14.7% 100

Interpretation:
Based on table , we can conclude that the investors objective of investment plan is capital appreciation or balance of capital appreciation and current income. It is clear that investors invest to accumulate wealth rather as an avenue to supplement their income.

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Preferred Investment Avenues

Based on the quantity of risk, the investment avenues are classified as follows Fixed Deposits/Bonds, Insurance schemes, Mutual Fund Schemes, Equities, Commodities and Real Estate. Investors were asked to choose preferred avenues. The resultant obtained, based on Weighted Mean Value is given in table. Investment Avenues Fixed Deposits/ Bonds/PPF Insurance Schemes Mutual Fund Schemes Equities Commodities/ Derivatives Real Estate Rank I II IV III V VI

Interpretation:
It can be concluded that the investors prefer FDs/Bonds/PPFs avenues than insurance schemes next to Equities and Mutual Funds. It was interesting to know that Indian individual investors still prefer to invest their surplus amount in risk free investment avenues next to insurances schemes. Table confirms that Indian investors are conservative investors.

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Financial literacy

When investors were queried about their financial literacy i.e. their ability or knowledge about financial terms or aspects of investments, it was found that most of the investors are financial illiterates. And the responses are shown in table. Frequency in Percentage Financial Literates Financial Illiterates Total 37.3 62.7 100.0

Interpretation:
In spite of majority of the occupants (65) are from accounts and financial related jobs most of them astonishingly expressed ignorance about the mechanism of investments, and the dynamics of risk and returns.

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Risk tolerance level and Suggestion of Suitable Portfolio to the Investors

Risk Tolerance Level Low Medium High Total No. of Investors in Percentage 41% 25% 34% 100

Interpretation:
The role of uncertainty and the lack of knowledge about the return on Investment Avenue are important components of any investment. The extent of an investors ability to tolerate these uncertainties of return is referred as risk tolerance level of an investor . Risk tolerance tends to be subjective rather than objective. Schaefer described the relation this way: two persons may very well agree on the riskiness of a set of gambles, but may nevertheless prefer different gambles, rank ordering them differently according to their personal tolerance. There are two common methods of estimating investors tolerance of risk. The first method is a clear understanding of the investor and his/her history with investment securities. The second method is to use a questionnaire designed to elicit feelings about risky assets and the comfort level of the investor given certain changes in the portfolio or certain investment scenarios. The second method is used to know the risk tolerance level of the investors. Based on the responses to the questionnaire, the cumulative scale is constructed and scores are assigned to each investor accordingly to categorize the respondents in to i.e. Low, Moderate and High risk tolerance level. Generally investors with a low risk tolerance act differently with regard to risk than individuals with a high risk tolerance. Investor with a high level of risk tolerance would be comfortable with market volatility, while low risk-tolerance individuals require stability and are averse to uncertainties. Individuals with low levels of risk tolerance require lower chances of a loss, choose not to operate in unfamiliar situations and require more information about the performance of an investment . From the sample of 100, it has been found that 41% investors have low risk tolerance and these investors should emphasize on capital preservation portfolio .25%Investors have moderate risk tolerance and these in investors should emphasize on balanced portfolio . And 34% investors have high risk tolerance and these investors should emphasize on aggressive capital appreciation portfolio.

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Findings
The study reveals that male investors dominate the investment market in India. Most of the investors possess higher education like graduation and above. Majority of the Investors belong to accountancy and related employment, non-financial management and some other occupations are very few. Most investors read two or more sources of information to make investment decisions. The investors decisions are based on their own initiative. The investment habit was noted in a majority of the people who participate in the study. The objective of investment was either capital appreciation or balance of capital appreciation and current income. Investors prefer to park their funds in avenues like PPF/FD/Bonds next to Equities and Mutual Funds Scheme. Most of the investors get their information related to investment through electronic media (TV) next to print media (News paper/ Business news paper/ Magazines) Most of the investors are financial illiterates. Gender and the risk tolerance level of the investor are independent attributes of the investor. Increase in age decrease the risk tolerance level.

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Conclusion

This study confirms the earlier findings with regard to the relationship between gender and age, the risk tolerance level of individual investors. The Present study has important implications for investment managers as it has come out with certain interesting facets of an individual investor. The individual investor still prefers to invest in financial products which give risk free returns. This confirms that Indian investors even if they are of high income, well educated, salaried, independent are conservative investors prefer to play safe. The investment product designers can design products which can cater to the investors who are low risk tolerant and use TV as a marketing media as they seem to spend long time watching TVs.

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Bibliography

http://www.bseindia.com http://www.nseindia.com http://www.google.com http://wikipedia.com http://scribd.com

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